The ratio of pension assets to liabilities, or funding ratio, for 131 state-sponsored defined benefit retirement systems was 80% in 2014, up from 74% in 2013, according to a report issued by Wilshire Consulting.
The “Wilshire 2015 Report on State Retirement Systems: Funding Levels and Asset Allocation” is based on data gathered by Wilshire Consulting from the most recent financial and actuarial reports provided by 131 retirement systems sponsored by the 50 states and the District of Columbia. Of the 131 systems studied, 92 systems reported actuarial values on or after June 30, 2014, and the remaining 39 systems last reported prior to June 30, 2014.
Of the 92 state retirement systems that reported actuarial data for 2014, 87% have market value of assets less than pension liabilities, or are underfunded. The average underfunded plan has a ratio of assets-to-liabilities equal to 73%. Those same plans reported pension assets and liabilities of $2,046.5 billion and $2,672.0 billion, respectively. The funding ratio for these 92 state pension plans was 77% in 2014, up from 70% for the same plans in 2013. These plans saw their pension assets grow by 13.7%, or $247.0 billion, from $1,799.5 billion in 2013 to $2,046.5 billion in 2014. At the same time, liabilities grew 4.7%, or $118.8 billion, from $2,553.2 billion in 2013 to $2,672.0 billion in 2014. Their aggregate shortfall, or net pension liability, decreased $128.2 billion over fiscal 2014, from $753.7 billion to $625.6 billion.
For the 131 state retirement systems that reported actuarial data for 2013, pension assets and liabilities in that year were $2,726.8 billion and $3,704.5 billion, respectively. Of these 131 state retirement systems, 93% were underfunded. The average underfunded plan in fiscal year 2013 had an assets-to-liabilities ratio equal to 71%.
“Global stock markets rallied strongly over the twelve months ended June 30, 2014, augmenting the positive performance of global fixed income and allowing pension asset growth to outdistance the growth in pension liabilities over fiscal 2014,” says Russ Walker, vice president and a member of the investment research group of Wilshire Consulting. “State pension portfolios have, on average, a 66.1% allocation to equities—including real estate and private equity—and a 33.9% allocation to fixed income and other non-equity assets. The 66.1% equity allocation is somewhat lower than the 67% equity allocation in 2004. Perhaps the most notable trend over the ten-year period has been the rotation out of U.S. equities into other growth assets such as non-U.S. equities, real estate and private equity.”
Wilshire forecasts a long-term median plan return equal to 5.99% per annum, which is 1.66 percentage points below the median actuarial interest rate assumption of 7.65%. It is important to note that Wilshire’s assumptions range over a conservative 10-year time horizon, while pension plan interest rate assumptions typically project over 20 to 30 years.
Wilshire Consulting also reported that the aggregate funded ratio for U.S. corporate pension plans increased to 77.2% for the month of February. “We estimate that overall the funded ratio for the sample plan increased by 3.9% from 73.3% to 77.2% in February. This increase was driven by the decrease in liability value of 3.5% versus the 1.7% increase in asset value. The asset result is due to positive returns for equities, while the liability value decreased due to rising corporate bond yields,” says Ned McGuire, vice president and member of the pension risk solutions group of Wilshire Consulting.